LLP vs Private Limited Company, Birds Eye Comparison
Many Entrepreneurs starting a new business are curious and confused about the
difference between a Private Limited Company vs LLP. Both entities offer many
similar features required to run a small to large sized business, while they also differ in certain aspects. In this article I decode compare Private Limited Company vs LLP from the viewpoint of an Entrepreneur starting a new business.
The Private Limited Company Registration process and the LLP Registration process are very similar with some differences in the documents and forms being filed for incorporation. The steps for incorporation of a Private Limited Company are
1. Obtaining Digital Signature Certificate (DSC) for the proposed Directors, 2. Obtaining Director Identification Number (DIN) for the proposed Directors, 3. Obtaining name approval from MCA and
4. Filing for incorporation.
LLP registration also has a similar process:
1. Obtaining Digital Signature Certificate (DSC) for the proposed Partners
2. Obtaining Director Identification Number (DIN) / Designated Partner Identification Number (DPIN) for the proposed Partners
3. Obtaining name approval from MCA
4. Filing for incorporation. Both Private Limited Company and LLP are registered with the Ministry of Corporate Affairs and are issued a Certificate of Incorporation.
The processing time for incorporation of a private limited company and LLP are also comparable with both entities taking on average about 20 days to incorporate.
The Government fee for incorporation of a LLP is significantly cheaper when
compared to the Government fee for incorporation of a Private Limited Company.
LLPs have been introduced to meet the needs of small businesses and hence LLP
enjoy lower government fee for incorporation. Also, the number of documents that have to be printed on Non-Judicial Stamp Paper and Notarized is lesser for LLP registration when compared to that of a Private Limited Company registration.
Both LLP and Private Limited Company offer many of the same features. LLP and
Private Limited Company are both separate legal entities and have assets and
liabilities that are separate from that of the promoters. LLP and Private Limited Company are both transferable, though a Private Limited Company offers more flexibility when it comes to transferring or sharing of ownership. LLP and Private Limited Company both have perennial life, unless and otherwise closed by the promoters or a competent authority.
LLP is a separate legal entity registered under the LLP Act, 2008. The partners of a LLP are notpersonally liable for the liabilities of the LLP. Partners have limited liability and is liable only to the extent of their contribution to the LLP.
Private Limited Company is a separate legal entity registered under the Companies Act, 2013. The Directors and Shareholders of a Private Limited Company are notpersonally liable for the liabilities of the Company. Shareholders have limited liability and is liable only to the extent of their share capital.
Private Limited Company offers more flexibility for the promoters when it comes to ownership and ownership sharing. The ownership of a Private Limited Company is determined by its shareholding and a private limited company can have upto 200 shareholders. Further, since the shareholders do not directly participate in the management of the company, there is a clear distinction in a private limited company between the owners of share and the management. Hence, private limited company is advantageous when it comes to ownership and management features.
In a LLP, there is not a clear distinction between the owners and management. In a LLP, the LLP Partners hold ownership of the LLP and also hold powers to manage the LLP. Therefore, a Partner in a LLP will be both a owner and a manager, whereas in a Private Limited Company, the shareholders (owners) do not necessarily have to have management powers. A private limited company is recommended for any business that is considering FDI or Employee Stock Options or Equity funding or Venture Capital funding.
Tax compliances are similar for both private limited company and LLP. However,
when it comes to compliance relating to the Ministry of Corporate Affairs, LLP enjoys significant advantages. A LLP does not have to have its accounts audited if the annual turnover of the LLP is less than Rs. 40 lakhs and the capital contribution is less than Rs. 25 lakhs. A private limited company on the other hand would have to file audited financial statements with the Ministry of Corporate Affairs each year.
A Pvt. Ltd. Company is required to pay a Dividend Distribution tax @ approx. 16.50 % at the time of distribution of profits to its shareholders. Such dividend income is tax free in the hands of the shareholders.
Taxation structure for LLP is simpler. LLP is subjected only to Income tax. Dividend Distribution is not applicable on LLP. Once profit is declared and tax is paid by LLP, the distributed income is tax free in the hands of the partners. Tax is levied on the firm at the rate of 30%.
Minimum Alternate Tax is applicable to both LLP and Pvt. Ltd. Company.
Fines and Penalties
The penalty for non-compliance or late filing of documents with the Ministry of Corporate Affairs are most of the times higher for a LLP as a flat fee of Rs.100 per day is levied when the non-compliance continues with no cap on the liability. Therefore, LLPs could incur larger penalty or fines from MCA due to non-compliance. Therefore, it is important for the promoters of a LLP to be aware of the due dates and file the required documents with the registrar on time.
Private limited companies have been in existence for longer than LLPs and enjoys widespread recognition in India and the world. Therefore, there are well established processes and procedures for Private Limited Companies. LLPs on the other hand is a recently introduced entity in India. Therefore, some of the rules, regulations and procedures are continuing to evolve. LLPs are also not as recognized in India as a private limited company, since it is a relatively new concept.
Private limited company offers its promoters a better image or standing than that of a LLP. Private limited company also enjoys better access to funding from banks and foreign direct investment.
LLP- Foreigners are allowed to invest in a LLP only with prior approval of Reserve Bank of India and Foreign Investment Promotion Board (FIPB) approval.
Private Limited Company- Foreigners are allowed to invest in a Private Limited
Company under the Automatic Approval route in most sectors.
Existence or Survivability
Partnership- Existence of a Partnership business is dependent on the Partners. Could be up for dissolution due to death of a Partner.
LLP- Existence of a LLP is not dependent on the Partners. Could be dissolved only voluntarily or by an Order of the Company Law Board.
Private Limited Company- Existence of a Private Limited Company is not dependent on the Directors or Shareholders. Could be dissolved only voluntarily or by Regulatory Authorities.